The U.S. federal government and numerous state government entities reached settlements with five of the largest mortgage servicers in the U.S. today in a deal they say is currently around $26 billion, but could reach $30 billion if more companies are brought into the fray. JP Morgan Chase, Ally Financial, Bank of America, Citigroup, and Wells Fargo are the first to participate in the settlement, but there could be more banks and mortgage companies added soon. While the deal is being hailed as historic there are still many that clamor, "It's not enough". This would be the biggest single-industry settlement since Big Tobacco's, Tobacco Master Settlement Agreement (TMSA) in 1998.
So far, JP Morgan Chase, Ally Financial, Bank of America, Citigroup, and Wells Fargo have agreed to a multi-step plan that includes providing about $17 billion in mortgage relief to homeowners, setting aside $3 billion for refinancing high interest rate loans to lower interest rate loans, and another $1 billion going to the federal government. As a result of this accord, a million Americans could get mortgage relief and several hundred thousand borrowers will get some type of compensation if their homes were foreclosed on between 2008 and 2011. Individual settlement related compensation is projected in the range of $1,500 to $2,000 per affected mortgage holder.
There are nine additional banks and loan servicing companies that are being eyed for inclusion in the settlements and officials from the White House today said they expect this will affect mortgage holders in all fifty states. Regulators and bank officials have been going back and forth for over a year trying to forge a plan that all parties could agree to and now, finally there is an end in sight to the negotiations. Many of the homeowners who will get relief under this settlement are those whose loans are upside down (they owe more on their mortgage than the homes current market value) because of the decline in housing prices.
It is expected that sixty percent, or more, of the settlement will go to writing down principal, something Obama has been pushing for. He has long taken the stand that by reducing the outstanding principal on some of these problem loans it would prevent defaults down the road when the homeowners can no longer make payments and foreclosures become imminent. Freddie Mac and Fannie Mae owned loans are not expected to be included in the write-down program, and the Federal Housing Administration has been clear about opposing this strategy repeatedly when the press has questioned its representatives.
Details of the settlement are still being unveiled, but it seems to be a somewhat complicated deal including cold, hard cash payments to affected borrowers and a convoluted system of credits for loan servicers. Including the credit system, borrowers could benefit beyond the hard dollars included in the deal. One other aspect of the program that is cause for concern is the qualification criteria for getting your loan principal reduced. First, and foremost, a borrower will have to have been late on payments or missed payments altogether to even be considered for the write-down program. This could potentially create a serious problem with people trying to game the system by intentionally skipping or delaying payments. Many government programs are routinely abused and scammed by people who have learned the loopholes and how to play the game to get what they want with minimal effort and financial resources. Regulators need to take a very close look at how they structure the rules for relief under this program so this doesn't become another free ride for people trying to get something for nothing.
It seems the big carrot for the lenders in this settlement is protection from potential future legal action. Borrowers still retain their individual rights to pursue legal action, and could even participate in future class action suits, but this settlement mitigates future regulatory action against lenders and loan services. Regulators were careful to not include too much in the settlement, and still left the door open on matters related to securitized loan products and criminal charges, if they need to go down that road in the future. No doubt, this is one of the biggest reasons the deal took so long to hammer out. Lenders surely were negotiating for an all-inclusive deal that would let them off the hook for every possible contingency. Thankfully, regulators stood their ground on at least some issues in this settlement.
One of the biggest benefits that may come out of this settlement is the creation of some stricter rules for how borrowers with problem loans will be handled in the future. From a political perspective, Obama will likely take credit for pushing this deal and will use it as proof that he is dealing with the mortgage crisis. Based on what's been announced so far, this settlement could be far from finalized, so stay tuned to see what unfolds. The U.S. Presidential candidates and President Obama are sure to be tuned in and on full alert to developments.
Blogger: John Sanchez |
